Wednesday, September 22, 2010

Gold hits another record as it nears $1,300

Global equities and government bond prices rose after the Fed on Tuesday laid the groundwork for further stimulus measures and expressed concerns about low inflation, yet made no policy shift at the end of a one-day meeting.

Spot gold hit a new record of $1,294.95 an ounce, before easing to $1,293.10 an ounce by 9.45am (GM, still showing a 0.6pc gain on the day. US gold futures rose by $21 an ounce to $1,294.50, having hit a contract high at $1,296.5.

"The key driver was the ... [Fed's] statement and the subtle change in language that it was 'prepared to provide additional accommodation if needed', a shift from the previous wording that it "will employ its tools as necessary'," said Robin Bhar, a Credit Agricole analyst.

"We interpret this as a conditional easing bias. It pushes the door for QE2 [another round of quantitative easing] wider and the implication that this has for a weaker dollar and further unease of what governments will do to weaken their currencies to support flagging economic growth."

Should the Fed resort to a second round of quantitative easing, which involves large-scale purchases of US government bonds to keep interest rates low in exchange for a cash injection into the system, gold's appeal to investors grows as the opportunity cost of holding a non-yield-bearing asset declines.

Also, fresh cash in the economy raises the risk of a pickup in inflation, which erodes the returns from currency, equity and bonds holdings, yet benefits owners of gold, who see the value of their holdings rise in line with consumer prices.